PROJECT RELATED SITE VALUE - The Australian Property Institute

PROJECT RELATED SITE ASSESSMENT
Authors: Grant Jackson & Nick Moore
It has become apparent that API members have been accepting instructions and preparing
valuation reports utilising the definition of Project Related Site Value.
Whilst various definitions of Project Related Site Value exist in the market place, the most
commonly used definition is as follows:
“The value of the site in relation to a particular project intended for the land being an
amount which depends entirely upon the success of the project as forecast in the analysis.
The Project Related Site Value does not represent the value of the land in isolation, but rather
an assessment by way of a hypothetical development cash flow analysis in relation to the
particular project proposed.”
Firstly, it should be noted that Project Related Site Value is not an API endorsed definition.
This hypothetical feasibility assessment is based on a particular set of circumstances which
may or may not reflect the accepted definition of Market Value.
Market Value, as accepted by the API, is defined as follows:
“The estimated amount for which an asset should exchange on the date of valuation
between a willing buyer and a willing seller in an arms length transaction, after proper
marketing, wherein the parties had each acted knowledgeably, prudently and without
compulsion”
In order to provide clarity surrounding the appropriate use and terminology of Project
Related Site Value, the Victorian Divisional Professional Board has prepared the following
article for consideration.
Most notably, the paper modifies the aforementioned definition to Project Related Site
Assessment rather than Project Related Site Value and explains the process and key drivers
behind providing this hypothetical assessment.
Another key element of the paper is to distinguish the difference between Project Related
Site Assessment and Market Value. Whilst it is conceivable in some instances that the
Project Related Site Assessment may be the same figure as Market Value, the two assessed
values are independent of each other.
Definition
“The value of the site in relation to a particular project intended for the land being an
amount which depends entirely upon the success of the project as forecast in the analysis.
The Project Related Site Assessment does not represent the value of the land in isolation, but
rather an assessment concluded by way of a hypothetical development cash flow analysis in
relation to the particular project proposed.”

FACTORS INFLUENCING THE VALUE OF LAND
Preamble
The value of land can change as the level of uncertainty and risk associated with the
successful and profitable development of the land is either mitigated or eliminated in the
development process.
Land in its virgin or greenfield state is subject to all of the inherent risks associated with
development of the site. As those risks are quantified, minimised or eliminated, the value of
land may change.
The value of land will always be dependant upon the prevailing market conditions and
general economic factors.
.
The following list whilst not intending to be exhaustive highlights some of the key items
which bring certainty and eliminate risk which in turn add value to land in relation to an
intended project.
Planning Risk
Once a site has either been rezoned to a higher and more appropriate use or a planning
permit has been issued for the most optimal use of a site, the value of the site can be
enhanced. The level of enhancement (if any) in value will be dependent on market
conditions, and be reflective of the certainty that planning risk for that particular project has
been eliminated.
Environmental Risk
Once it has been established via expert consultants and both local and state authority
approvals that a particular site is free of any environmental concerns either on the land or
within the land, this has the impact of bringing greater certainty and confidence to the
intended project for the site.
Construction Risk
On the assumption that the particular project represents the highest and best use of the
land, once that project has been independently costed by a qualified Quantity Surveyor, or
tendered and awarded to a reputable construction company, a higher degree of certainty is
attached to the project intended for the site and the level of risk is mitigated.
As the construction of the project proceeds through the development program in a timely
and orderly manner and in accordance with budget, the level of construction risk may be
gradually minimised.

Servicing Risk
A particular site may require servicing to meet the needs of the intended project or an
upgrade of existing services to be able to reap the potential and develop to the highest and
best use of the site. Once it is established with the appropriate authorities that the available
services are either able to be connected or the cost to connect those services is accurately
established, this may mitigate the level of risk and uncertainty in providing services to the
land.
Leasing Risk
In those projects where a component or all of the proposed development is for investment
purposes where a tenant or multiple tenants are being sought for the development, the
level of risk associated with attracting tenants is minimised with the signing of agreements
to lease to occupy the development upon completion.
The commitment of a major tenant or multiple tenants to a proposed project will bring
increased certainty to the project in terms of market demand and acceptance together with
establishing the level of return achievable from the proposed development.
The securing of commitments to lease also brings certainty to the initial unknown lease
terms and conditions anticipated for the development. The securing of future income upon
completion of the development provides a higher degree of certainty and confidence in the
viability and acceptance of the proposed project.
Financing Risk
Invariably most developments of land involve the procuring of finance to assist in the
development process. Once suitable terms and conditions have been negotiated with a
reputable financier the level of risk and uncertainty associated with a project may be
substantially mitigated.
Realisation Risk
Whether the form of development of the land be for longer term investment purposes,
immediate sale or a combination of both the ultimate realisation of the completed project is
a critical factor in the viability of the development of the site. If a pre-commitment to sell the
entire project or various components of the project either prior to or during construction is
achieved, on reasonable market terms and conditions with a full deposit being paid, this
brings a higher degree of certainty to the end realisation achievable for the project.
Settlement Risk
Even though projects may attract interest from purchasers via the way of presales either
prior to or during construction, those contracts are still subject to formal settlement and
payment of the balance of the purchase price. Once a project is completed in whole or in
stages, those components of the development which are able to settle and full purchase
monies received bring further certainty to the development of the site.

Profit & Risk
Each Project Related Site Assessment will require an entrepreneurial market based margin
for profit and risk which should reflect the risk associated with any such development.
Preferred Valuation Methodology
In considering the Project Related Site Assessment the preferred methodology to value is the
hypothetical development or feasibility approach related to the specific project proposed for
the site. The hypothetical development method is a long accepted approach to value which
is undertaken by competent valuers on a daily basis for a range of asset classes and purposes
of valuation for vacant land or sites suitable for development.
The criticism often made of the hypothetical development approach is that it is dependant
upon the accuracy and certainty of the variables assumed by the valuer in the overall
development model. If each of those variables adopted by the valuer are able to quantified
with a greater level of certainty, there is a far greater likelihood that the land value indicated
from the hypothetical development approach will be more accurate, having regard to the
project proposed.
The direct comparison of the sale of vacant land to assess the land value of a specific project
may not necessarily be an accurate and equitable means of comparison when a specific
project is being considered. If a specific project for a site has been able to mitigate to a large
extent a number of the uncertainties and variables associated with the potential successful
development of the land, the value of that site may well be substantially different from the
value of otherwise similar vacant sites without such benefit. Those sites may not be subject
to a similar level of certainty in respect of their development potential.
Importantly, valuers and users of valuation reports alike should be aware that these site
specific value-add enhancements highlighted herein can diminish or disappear entirely
within a short period. This can be due to a number of factors including, but not limited to, a
change in the highest and best use of the site, depressed market conditions or reduction in
demand for the project upon completion.
Furthermore, it is important to recognise and have an appreciation of the ability to transfer
those identified enhancements. For example, a planning permit or pre-sales might be
reflected in the price paid in the open market but a developer’s ability and capacity to sell
down a project may vary significantly and reflect an intangible component which does not
necessarily run with the land in an open market transaction but may instead be addressed in
a Project Related Site Assessment.
Valuation Instructions
The Project Related Site Assessment is based upon a particular project proposed for the site
which as outlined above may be at a relatively advanced stage of development with the
satisfying or elimination of the various risks associated with the development of land.
This terminology varies from the definition of Site Value as outlined within the Valuation of
Land Act 1960 which is as follows:

“site value” of the land, means the sum which the land, if it were held for an estate in fee
simple unencumbered by any lease, mortgage or other charge, might in ordinary
circumstances be expected to realise at the time of valuation it offered for sale on such
reasonable terms and conditions as a genuine seller might be expected to require, and
assuming that the improvements (if any) have not been made”;
Valuation Instructions (continued)
The Australian Property Institute has also published a definition of market value which is
based broadly on the principles as set out Spencer v the Commonwealth [1907] 5 CLR and is
as follows.
“Market Value is the estimated amount for which an asset should exchange on the date of
valuation between a willing buyer and a willing seller in an arms length transaction, after
proper marketing, wherein the parties had each acted knowledgeably, prudently and without
compulsion.”
The Project Related Site Assessment definition relates to a specific project intended for the
site and is therefore a specific and narrow definition for a particular project and is not to be
misconstrued as a more generic and general definition of site value within the Valuation of
Land Act or market value as prescribed by the Australian Property Institute.
Disclaimers and Limiting Conditions
It is strongly recommended that any valuer providing a Project Related Site Assessment
should firstly have clearly established a proper definition. The valuer should then verify with
formal documentation those matters assumed as part of the process to either limit or
eliminate the risk associated with a specific project are valid.
In this regard documentation could include but is not limited to a copy of the planning
permit, a copy of a signed transferable construction contract binding on the parties specific
to the proposed project, any agreements to lease, offers to lease, or other indicators of
tenant demand to assist in establishing rental parameters and demand for the project,
signed copies of presale contracts for the entire or proposed components of the
development including documentation of deposits paid, confirmation of appropriate expert
reports in relation to environmental issues, heritage issues and servicing of the land and
confirmation of the appropriate funding terms and conditions from a reputable financier.
If documentation has not been provided or has not been sighted then the appropriate
qualifying and limiting conditions surrounding the assumptions made should be clearly
outlined. If the documentation has been provided that documentation should be specifically
referred to if it is relied upon or not relied upon as part of the hypothetical development
approach to value. Documentation alone does not relieve the valuer of the obligation to
undertake their own independent enquiries to satisfy themselves of the market conditions
for the particular project proposed for the site.
Market Value
It is recommended that if a valuer is requested to provide a Project Related Site Assessment
of a parcel of land having regard to a particular project, the valuer also provide the Market

Value of the land in accordance with the endorsed API definition of market value. This
assessment should be underpinned by comparable contemporaneous sales and will highlight
the variation (if any) between the two approaches to ensure the reader of the report is fully
aware of the difference between a Project Related Site Assessment and the Market Value of
the land.